Business Credit

Economically beneficial supply chain development

The economic conundrum

SME growth and development, both formal and informal, is core to economic development in South Africa and Africa. The economic conundrum is, however, that access to finance to develop their businesses is one of the major obstacles SME’s face.

While SME funding in the form of government grants is sometimes available, the funding often fails to reach the entrepreneurs who could benefit most from this financial support. Likewise, commercial credit is not readily available to SMEs. This is mainly due to financial institutions using traditional credit scoring models to evaluate SMEs credit risk. Rather than considering potential, they consider the applicant’s balance sheet and underlying creditworthiness. This practice makes it near impossible for most emerging businesses to meet the criteria of traditional financial institutions.

In the broader economy, this means emerging businesses are often excluded from the preferred supplier lists of large corporate businesses because they are unable to fund larger transactions. While there are multiple initiatives that aim to involve small business in the supply chain, it is mostly established businesses that benefit from meeting the supply chain needs of large corporate businesses.

As result, the aim to create broad-based economic participation fails. Instead of broad economic prosperity, only a small subset of the population benefits. This leads to stifled economic growth and ongoing pressure on governments to support the poor with handouts and grants.

Many governments in Southern Africa are already under economic pressure. The widespread provision of grants over the long-term will make socioeconomic development unsustainable, especially if these economies are to compete on a global scale.

Supply chain development mirrors the economic conundrum

This economic conundrum is mirrored in the supply chain development of large corporate business (LCB) in Africa. Most corporate businesses have a preferred vendor structure with the real intent of providing opportunity to emerging businesses. The structure is however a minefield and key obstacles include:

Access to funding

Skills of emerging businesses

Fraud

Goods being delivered according to schedule and specification is not guaranteed

Failure to deliver in respect of purchase order specifications has many negative effects. Most substantially, the operations of corporate involved is affected by non-supply and the vendor is removed from the preferred vendor list.

Corporate business in South Africa also have incentives to uplift emerging businesses in its supply chain to improve their BEE scorecard ratings and this adds gravitas to the performance of the emerging businesses in the chain.

Value added through this solution

The benefits to the supply chain process may be obvious, but in addition to these benefits, EDF also provides –

Effective training of the vendor in respect of the transaction and related regulatory conditions, and especially the:

financial implications and cash flow management

functional guidelines to ensure effective procurement and sourcing

financial management of the cash flows in the vendor’s business (including VAT and other taxation provisions)

Protection for all parties in respect of the potential fraud often associated with such transactions.

The business’s ability to access and effectively allocate procurement spend to Exempted Micro Enterprises, Qualifying Small Enterprises, Black Owned and Black Women Owned vendors is made feasible by Ecsponent’s solution. This solution results in an increase in preferential procurement spend with such vendors and similarly in and increase in preferential procurement points on the company’s BEE scorecard.

The training and financial management assistance Ecsponent provides to the qualifying vendor, paid for by the business, could be classified as Skills Development, Enterprise Development or Supplier Development.

The B-BBEE Codes differentiate between “Enterprise Development” and “Supplier Development”, whereby Enterprise Development constitutes contributions to a qualifying entity that is not a supplier of the large business. During the initial stages of evaluation of a potential vendor, any qualifying contributions made to such an entity (whilst not yet a vendor) would constitute an Enterprise Development contribution.

Once the entity becomes a supplier, then the business will be entitled to one bonus point for the graduation of the entity to “Supplier Development” level. Contributions made once the entity has “Supplier” status will constitute Supplier Development.

Where the large business pays for assistance rendered to the qualifying vendor, the cost of such assistance will be recognised at a benefit factor of 100% on the LCB’s Supplier Development scorecard.

Where the large business deploys funding to the qualifying vendor, such funding will be recognised on its Supplier Development scorecard at a factor of either 70% or 50% of the outstanding loan amount, depending on security and terms. In addition, if payments are made to the qualifying vendor within 15 days from the date of their invoice, then a “cash-flow assistance” contribution will be recognised on the business’ Supplier Development scorecard.

The business’ expenditure towards individual employees of the vendor could be classified as such and recognised on the business’ Skills Development expenditure scorecard.

The Ecsponent Supply Chain Solution can be tailored to complement the large business’ existing B-BBEE scorecard in order to maximise the available BEE benefits.